Amazon is facing a new problem, after it was revealed that the big online store used a series of illegal strategies to boost profits including an algorithm that boosted prices to consumers by more than A$1.55 billion, the Federal Trade Commission revealed overnight.
How the scheme worked is that Amazon whose business is growing in Australia, simply created a “secret algorithm internally code named ‘Project Nessie’ to identify specific products for which it predicts other online stores will follow Amazon’s price increases.
Amazon used Project Nessie to extract more than one and a half billion dollars directly from consumers pocketbooks,” the FTC said.
The FTC lawsuit was filed in September, but many details were withheld until last night when a version of the legal action with fewer redactions was made public in the US District Court in Seattle.
The FTC has also claimed that an unnamed Amazon executive who headed global fulfillment had what he called an “oh crap” moment when he realized that letting sellers be on Prime without using Fulfillment by Amazon was “fundamentally weakening [Amazon’s] competitive advantage” by encouraging sellers “to run their own warehouses.”
Amazon average fees for sellers who used its fulfillment services increased from 27% in 2014 to 39.5% in 2018, the FTC said.
At the time Amazon required sellers under the company’s Prime feature to use its logistics and delivery services even though many would prefer to use a cheaper service or one that would also service customers from other platforms where they sell, the FTC claims.
Amazon spokesman Tim Doyle responded claiming that FTC “grossly mischaracterises” the pricing tool and the company stopped using it several years ago.
“Nessie was used to try to stop our price matching from resulting in unusual outcomes where prices became so low that they were unsustainable,” Doyle said.
The New York Post reported that Amazon began testing the pricing algorithm in 2010 to see if other online retailers tracked its prices and to raise prices for products that were likely to be tracked by competitors, the complaint said.
The US Companies operation was launched in Australia in 2017.
After outside retailers began matching or increasing their own prices, Amazon would continue to sell the product at an inflated price, the FTC alleged, which resulted in excess profit.
Amazon paused the algorithm during its Prime Day sales events and the holiday shopping season when there was more media and customer attention on the online retailer, the FTC said.
“After the public’s focus turned elsewhere, Amazon turned Project Nessie back on and ran it more widely to make up for the pause,” the lawsuit said.
Shortly after Amazon was launched in Australia Amazon in April 2018 used it to set prices for more than 8 million items purchased by customers that collectively cost almost $194 million, the complaint said, before pausing it in 2019.
Amazon retail executive Doug Herrington in January 2022 asked about using “old friend Nessie, perhaps with some new targeting logic” to boost profits for Amazon’s retail arm, the complaint said.
The FTC complaint also accuses Amazon of seeking to hide information about operations from antitrust enforcers by using the Signal messaging app’s disappearing message feature and said the company destroyed communications from June 2019 to early 2022.
